A Review of the Internal Capital Allocation Literature: Piecing Together the Capital Allocation Puzzle

Allocating internal financial capital represents a key task for managers of multidivisional corporations. This has led to a wealth of research and theorizing about capital allocation and whether or not managers allocate capital successfully. However, capital allocation research has diverged in a number of directions that reflect different and often incompatible perspectives, underlying frameworks, and outcomes. The result is a puzzle, wherein scholars have found little consistent substantive relation between capital allocation, business unit characteristics, and firm performance. Through our review, we seek to bring clarity to this puzzle by identifying problems in the literature and by offering a solution. We suggest problems in the literature stem from the disparate approaches scholars have taken when studying capital allocation, including assessments of what constitutes and prevents successful allocation. We begin by organizing these approaches into a framework that highlights key allocation strategies and the primary impediments to allocation success that scholars have used to build their models. We then suggest that managers may employ a number of allocation strategies and that scholars need to recognize that not all corporate managers employ the same strategy. We contend that a resurgence of obtrusive, qualitative, and multilevel studies may help explain why managers select one strategy over another. Ultimately, we recommend scholars delve into the black box of organizations to truly understand capital allocation.